Question

In an economy where heating oil is the primary source of heat for most households, new supplies of natural gas, a substitute for heating oil, are discovered. Natural gas provides heat at a much lower cost. What is the most likely effect of these discoveries on the market price and quantity of heating oil produced?

A. Price Decreases & Quantity Decreases
B. Price Decreases & Quantity Increases
C. Price Increases & Quantity Decreases
D. Price Does Not Change & Quantity Does Not Change

Answer 1

B. Price Decreases & Quantity Increases

Step-by-step explanation:

Since natural gas provides heat at a much lower cost, most households will begin to use natural gas and stop buying heating oil because natural gas can serve as a substitute to heating oil at a lower cost. This will result in decrease in price of the heating oil to encourage households to buy, and since more households prefer to go for natural gas, the quantity of the heating oil will increase.